Pfizer and America’s Corporate Exodus – The New Yorker

James Surowiecki writes in the New Yorker about “inversions” — US companies moving their legal domiciles overseas for tax savings.

Two features of American tax policy make inversions attractive: a relatively high corporate tax rate and what’s called a worldwide tax system—American corporations have to pay that tax rate on all their global income. That makes the U.S. unusual; every other country in the G-8, and eighty per cent of the countries in the O.E.C.D. (the club of industrialized democracies), has adopted some form of what’s known as a territorial tax system, in which companies largely pay taxes only on the income they earn in a country.

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[One suggestion would be] to follow the lead of countries like Germany and Japan and adopt a hybrid territorial system. Although the details are complicated, you’d start with the “territorial” principle that profits would be taxed where they’re earned. But since any territorial system is vulnerable to tax-avoidance schemes—like shifting income abroad to make it look as if profits were being earned abroad—you’d also need tough anti-abuse provisions, like taxing at least a fixed percentage of foreign earnings and limiting companies’ ability to channel income to subsidiaries in low-tax countries. And, as part of any such change, companies should be required to pay taxes on all the cash they’re currently holding abroad. In theory, such a system could keep companies (and more of their workers) at home and bring foreign earnings back, without putting a real dent in U.S. tax revenue. This strategy also has some bipartisan appeal; versions of this type of reform have been offered by both the Obama Administration and Republicans in Congress.

But why give corporations any sort of tax break at all? The reality is that America’s global taxation system is a legacy of a bygone era. In the past, the fact that our tax system was “worldwide” mattered less, both because the U.S. was such a huge part of the world economy and because being incorporated in the U.S. made companies more appealing to stockholders. But those advantages are diminishing. Investing abroad is more attractive and easier than ever before, and capital is more mobile. “As the economic differences between the United States and other countries narrow,” a 2015 study of tax systems concluded, “the ability of the United States to sustain US tax exceptionalism will also decline.”

Of course, any consideration of policy should factor in competing governance standards as well.